In October, the Consumer Financial Protection Bureau published its first supervision examination manual which will be of interest to bankers and other financial service executives.
On one level, the manual is fairly pedestrian and may contain little surprising in that most bankers have a fairly extensive appreciation of (and experience with) an examination process. And, of course, the Bureau has direct supervisory authority only over the roughly 100 large banks, thrifts, and credit unions that have assets more than $10 billion.
What should be interesting to many bankers, however, is the insight the Manual provides into the examination approach of the Bureau, an approach that will doubtlessly influence and inform the practices and procedures of all other financial institution regulators, large and small. Essentially, the Manual describes the Bureau's process for risk assessment: first there will be the establishment of the inherent risk of a particular "product" line for consumers and then there will be an assessment of an entity's set of quality controls to manage and mitigate the risks.
As bankers consider the Manual and its implications for the future regulatory approach of the Bureau, they will be particularly interested in its discussion in a hitherto unknown concept in consumer financial regulation: "abusive" practices.
As a matter of law, the Bureau has jurisdiction over "unfair, deceptive and abusive" practices. Unfair and deceptive are fairly established legal terms; indeed much of existing consumer law and regulation is predicated on these terms. "Abusive" in the context of consumer financial practices is new however (although there is precedent in other contexts). The Manual suggests a practice will be "abusive" if it:
Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
Takes unreasonable advantage of –
A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or
The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
There are no concrete examples of "abusive" practices in the Manual of course because the Bureau has yet to begin its examinations or to institute enforcement actions. The Manual does contain a template for risk assessments that provides an indication into what will be the approach of the Bureau to its review of consumer products and practices:
Products are bundled in a way that may obscure relative costs;
The terms of the product are subject to change at the discretion of the entity, and the entity has frequently made changes in the terms; and
Complex products are marketed to consumers not likely to benefit from them or who may be likely to be harmed by them.
It would appear, then, the Manual confirms what had been predicted since the passage of the Dodd-Frank Act and the creation of the Bureau: that bankers and financial services executives should be prepared to deal with a review of their products and practices, during a examination by the Bureau, that goes much further than the current review which is grounded in compliance with the disclosure requirements of various federal and state statutes, such as the Truth in Lending Act. This review will apparently be more subjective and less empirical.